Pattie Lovett-Reid: How vulnerable are you to higher interest rates?
Everyone seems to be talking about the cost of borrowing money after the recent Bank of Canada increase, but I have to wonder: Do we really know how much money we owe? How about what interest rate we are currently paying, or what sort of actual dollar impact the recent rate increase will have, and at what point can are we no longer in a position to pay off your current debt level?
If you are asking yourselves these questions you can be sure others are, as well. And I would bet none of us could answer all of the questions.
Consumer debt in Canada has been on the rise as interest rates have been at historical lows and there is a whole generation who are only familiar with single digit lending rates. Richardson GMP describes the lending environment as follows: "When interest rates fall, borrowing becomes less expensive, lending increases, spending increases and in many cases asset values increase. Look no further than the housing market in Canada."
Recent data from the Bank of Canada indicates that household debt, which includes consumer credit, mortgage and non-mortgage loans, totaled $1.933 trillion, and $1.268 trillion, or 65 per cent of that came from mortgage debt.
To make matters worse, for every dollar of disposable income we have coming in we owe approximately $1.69. The concentration of this debt deemed to be “highly indebt” is represented by about 12 per cent of the population who have a total debt-to-gross income ratio above 250 per cent, according to the Bank of Canada. And to make matters even more dire, this 12 per cent concentration holds 43 per cent of the household debt in Canada and it appears to be focused on those aged 21 to 35 and concentrated in British Columbia, Alberta and Ontario
Gareth Watson, Director, Investment Management Group Richardson GMP says there are three things that threaten Canadians, younger ones in particular:
- A drop in housing prices: As interest rates go higher borrowing becomes more expensive and asset prices (not only homes) will cool. Note that 'cooling' is very different from collapse.
- Debt: Interest rate increases don’t mean having debt is a bad thing as long as you can service it and eventually pay it back. That, of course, is easier to do in a low interest rate environment. As rates go higher the strength of the Canadian household and the Canadian consumer will be impacted.
- Potential job loss: Coupled with the high debt levels, this is a reminder of how vulnerable Canadians really are if they become unemployed.
If you have ever wondered why you should pay down debt in a ridiculously low rate environment, it is because one day those rates will head higher ... just as they just did this week.